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Old 05-17-2011, 08:00 PM   #21
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Is this too much to have in TIPS and what is a negative yield?
In the case of TIPS, it means your yield is negative after inflation is subtracted. Most funds quote their yields in 'nominal' terms (which is the actual dollars you get paid). The TIPS funds quotes its yield as a 'real' yield, which is the amount you get after inflation is subtracted. So you can't compare the TIPS yield directly to the yields on normal bonds. To compare them you have to make an assumption about what inflation is going to be, and either add that inflation rate to the TIPS fund or subtract it from one that quotes its yield in 'nominal' terms.

It's probably helpful to consider that most other short to intermediate funds also have negative yields after inflation is subtracted. Here is a partial list of vanguard funds with negative real yields (based on LTM CPI)

Prime Money Market
Short-Term Federal
Short-Term Bond Index
Short-Term Investment Grade
Inflation Protected Securities
Intermediate-Term Bond Index
Intermediate-Term Treasury
Total Bond Market Index
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Old 05-19-2011, 07:13 PM   #22
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Why own a bond fund with a negative real yield? We have VG Short-term Investment Grade bond fund and VG Total Bond market index, in addition to the TIPS fund.

Also, since the return on CD's is so low, is there a similar vehicle that is a good way to set up a "ladder"?
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Old 05-19-2011, 07:44 PM   #23
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Why own a bond fund with a negative real yield? We have VG Short-term Investment Grade bond fund and VG Total Bond market index, in addition to the TIPS fund.

Also, since the return on CD's is so low, is there a similar vehicle that is a good way to set up a "ladder"?
Because in the current climate you would have to increase the risk you are willing to take for higher yields. TIPS diversify your bond portfolio as they hedge against unexpected inflation Treasury Inflation Protected Securities - Bogleheads which nominal bonds do not.

DD
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Old 05-20-2011, 08:48 AM   #24
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The times when US treasuries are "safe" and international bonds are "risky" are long gone. Look at how much has been lost in the the value of the dollar holdings. Looking at sovereign balance sheets there are countries that are arguably safer than US. My strategy is to team up with the smartest bond guys and let them direct my international exposure.
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Old 05-20-2011, 09:08 AM   #25
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I would never buy a high yield bond as it has the same risk as an equity fund.
Actually, the High Yield bond funds from Fidelity and Vanguard have about half the volatility of the S&P.

Volatility and risk are not really the same thing, but they are typically used interchangeably in discussions like this. Volatility is a calculation, risk is a kinda squishy thing that would probably mean different things to different people and situations.

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Old 05-20-2011, 06:16 PM   #26
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Actually, the High Yield bond funds from Fidelity and Vanguard have about half the volatility of the S&P.

Volatility and risk are not really the same thing, but they are typically used interchangeably in discussions like this. Volatility is a calculation, risk is a kinda squishy thing that would probably mean different things to different people and situations.

-ERD50

Exactly. Successful investors understand the difference between these two things. Lazy investors assume they are the same. Buffett in particular is really good at being willing to accept highly volatility investment which aren't particularly risky.

A classic example is hurricane insurance companies which have very volatile earnings. No hurricanes they make big bucks, a couple a hurricanes they make a small profit, Katrina they lose a ton of money. However, it isn't particular risk business to issue hurricane insurance if you can spread your risk out over many years and wide areas.

Junk bond funds are inherently less risky than buying equities. Sometimes they have offer great risk/reward ratio other times not so great. I happen to think that this is one of those times when they aren't great.
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Old 05-20-2011, 09:00 PM   #27
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The other problem with junk bonds is their correlation with equities is very high. They zig when the market zigs.

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